Chapter 9: Judgement & Decision Making Flashcards
Rational Behavior
Objective and logical
Irrational behavior
More subjective and biased
Psychological bias
Psychological factors affect our decision making in consistent ways
We are predictably irrational, which means
Our errors are systematic and reliable
Thinking fast (System 1)
Refers to decision making that operates quickly with little effort and less control
Thinking slow (system 2)
Refers to decision making that operates more slowly, with more effort and more deliberate control
Heuristics
mental shortcuts we take as part of thinking fast
Base rate frequencies OR prior probabilities
Probabilities that reflect the state of the world - how often an event or situation actually occurs
Representative Heuristic
The mental shortcut used to estimate the likelihood of an event based on how closely it matches or represents related examples or stereotypes in mind; but it causes people to focus on stereotypes
Conjunction fallacy
The false assumption that a combination of conditions is more likely than either condition by itself
Law of Sample Size
Smaller sample sizes produce more variance
Gambler’s fallacy
The faulty reasoning that past events in a sequence affect the likelihood of future events
Hot-hand effect
The perception of being “on a roll”
Availability Heuristic
Shows that people estimate the frequency of an event based on how easily examples come to mind
Anchoring
Refers to how different starting points (initial values) produce different estimates or decisions
Decoy Effect
The introduction of a more or less expensive item provides an anchor to stimulate the sales of the target item
Deliberation-without-attention effect
You have consciously made a decision, but unconscious processes helped you reach it
Less-is-More effect
Refers to situations where too much information, computation, or time devoted to a problem may lead to less accurate, sensible, or satisfying decision
Recognition Heuristic
People who are presented with 2 alternatives place higher value on the one they recognize vs the one they don’t
Fluency Heuristic
People assign higher value to the option that is recognize first, that is, more quickly and easily
One-Clever-Cue Heuristic
To base one’s decision on a single cue
Take-the-best-cue Heuristic
The idea that you consider each cue in turn
Fast-and-frugal search trees
Involve a limited set of yes or no questions rather than a larger set of probabilistic ones
Tallying
A heuristic that simply involves counting the number of cues that favor one alternative over another
We make choices that maximize:
Utility, which is the satisfaction we obtain from choosing an option
Rational Choice Theory
We make decisions by comparing the expected value of our options
Normative theories
Based on rational, logical, and mathematical calculation to compare decision options, explaining how decisions should be made in order to maximize utility and rewards
Descriptive theories
Concerned with how we actually decide, describing beliefs, and preferences as they are, not as they should be
Decision making deviates from normative analysis for what 2 main reasons?
- Options are ambiguous, or open to more than one interpretation
- Utility is subjective; it is dependent on the decision maker and context
Loss aversion (AKA prospect theory)
People hate losses more than they enjoy equivalent gain, and they tend to prefer a sure gain over risky game
When faced with a sure loss, people become _____
Risk seeking; they are willing to lose more if the bet allows them a small chance of avoiding any loss
Framing effects
How problems are framed or presented produces radically different decisions
Status Quo Bias
Is a preference for the current state of affairs. Any change from how things are, or even the act of considering a change, requires time, effort, and frequently money (these negatives are known as transaction costs)
Optimal Defaults
Automatically placing people into options that have the greatest benefit
Endowment Effect
The tendency to overvalue what one has in hand
Sunk cost effect OR Concorde Fallacy
A maladaptive behavior; the greater tendency to continue an endeavor once an investment in money, effort, or time has been made
Neuroeconomics
A field that combines insights from economics, neuroscience, and psychology
Willingness to pay
The decision of whether someone will purchase an option or item
Raise the prospect of using brain scanning to predict product preferences, a field known as _____
Neuromarketing
